Contestable market theory is an economic concept that refers to a market in which there are only a few companies that, because of the threat of new entrants, behave in a competitive manner. Considerable criticism surrounds this theory because there are often large entry and exit costs associated with entering a market.
Critique of Contestable Market Theory. From 1979 to 1981 there was a lot of “hit and run entry” into the airline industry. This partly influenced
In theory Contestable markets sounds like a great idea for the market in many reasons however in reality the question is posed: Can markets
William Baumol, “Contestable Markets: An Uprising in the Theory of Industry Structure,” American Economic . B. Criticisms of Contestable Markets Theory.
Criticisms of the theory. The extent to which the theory of contestable markets may be applied in practice is limited. Firstly, firms' sunk costs must be low so that they can easily leave the market. However, in reality sunk costs may be extremely high, even when capital is transferable.
As well as looking at barriers to entry, there are other factors that might indicate the competitiveness of a market. The level of profit. If the market is highly profitable, this suggests the market is less contestable. In theory, if firms are making supernormal profit, it would attract new firms into the market.
contestable markets in their 1982 book, Contestable Markets and the Theory . 3In an earlier publication Baumol himself was a thoughtful critic of the very type
a single statistic, came under criticism with the maturing of the eco nomics profession . ment with contestable market theory in the early 1980s.
The theory of contestable markets, along with the static and dynamic views of The general criticism of the dynamic view of competition is that is lacks the
markets are developed. Conventional entry barrier theory is reviewed and contrasted with contestable market theory. The criticisms, experimental evidence, : and